Rising Interest Rates
Markets go up and down. We’ve all seen several big swings in the stock market, the real estate market, and the price of gas over our lifetimes. What is less commonly experienced is having downturns in stocks and bonds at the same time.
Over the last several months as inflationary pressure builds, we’ve seen bonds and mortgages have negative returns. This had a big impact on conservative investors who traditionally have more money in bonds than they do in stocks. Stock investors are more used to seeing swings in their portfolios as stocks have a negative year about every four years. However, the first quarter was very unusual in that negative returns in both stocks and bonds affected all investors.
During the 2020 Covid panic, the yields on treasury bonds got to historic lows. At one point the two-year treasury bond was returning 0.12%. Last Friday, they had risen to 2.37%. As interest rates go up, bond prices go down so bond mutual funds go down in value when interest rates rise. However, there is a good side to this. Bonds, in many respects, are self-correcting because when bonds with lower interest rates mature, they are replaced with new bonds that have much higher interest rates. These new higher interest rates mean higher yields on fixed income investments.
If your plan is appropriate for your long-term strategy, one unfavorable quarter or one unfavorable year should not trigger a change in strategy. These ups and downs are part of what makes a market. As you know, when financial markets are volatile people tend to think they should do something but most often the best thing to do is stick to your long-term plan. It’s certainly appropriate to make changes when your circumstances, your goals, or your objectives change but generally not because of changing markets.
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